Ican 2023 Strategic Financial Management Question 4

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of N500m and pay off penalty of N35m for early redemption of the loan. Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year. Kenny’s current capital structure is summarised below: Ordinary shares (25 kobo per share) ₦800 million Share premium ₦1,120 million Revenue reserves ₦2,310 million ₦4,230 million 15% term loan ₦500 million 11% bond ₦900 million ₦5,630 million The company’s current share price is 190 kobo, and bond price ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year. The stock market may be assumed to be semi-strong form efficient and no information about the proposed uses of funds from the issue has been made available to the public. Taxation may be ignored.